The impact of COVID-19 for corporate banking is tremendous and will force banks to reconsider their business models going forward. Despite the fact that banks are better prepared compared to the financial crisis of 2008, the competitiveness of the stagnating corporate banking market was already challenging for many banks before the pandemic. Given the shutdown for many industries, we expect a decrease of the German corporate banking market by 2.1% (before risk) and a GDP growth in Germany of -7.2% for 2020. Based on our analysis as well as feedback from clients, the corporate banking market will recover to pre-crisis levels approximately within the next four years.
What are the most relevant topics that need to be addressed in the short, medium and long-term to compensate shrinking revenues, increased risks and ongoing cost pressures?
Corporate clients of those industries that are affected most will use all existing bank lines to increase their liquidity buffer. At the same time, frequent borrowers will tap the dept certificates-/ bond market whenever there is a window of opportunity. This will be accompanied by state support via KfW programs. Last but not least, a proper supply chain and working capital management will be essential to find the way through the crisis.
Banks need to carefully monitor this within their respective corporate portfolio. They will also need to have their own liquidity position always at hand, as funding will be challenging, especially if banks are dependent on the capital market only.
Based on the extraordinary demand of liquidity, banks will face a material shift in the risk profile of the corporate portfolio, which at the same time will have an impact on RWA constraints and on the capital requirements dictated by the regulator. Corporate Germany is still and by almost 80% “financed” by bank loans, which will even further stress the implication for the risk profile of banks. Based on internal analysis as well as interviews with CROs of banks, we also expect a shift from longer to shorter maturities while margins will increase.
The second most important product line for corporate Germany is cash management and trade finance. Based on our analysis, we expect a decrease of this product line, as international shutdowns are causing trade volumes across the globe to shrink.
The corporate profile as well as the product offering was already fragile for many banks pre-crisis, as costs were going up due to increased regulatory requirements. At the same time, revenues for mid-sized companies, large corporations and multinational clients eroded. COVID-19 will fortify this. The pressure on banks will dramatically increase, as for many their corporate banking units will even further eat-up profits from other business lines.
The key question for banks is: Can I afford to cover all client segments in all industries and with the full and current product range, whilst keeping my corporate banking unit profitable and sustainable at the same time?
Already before the crisis, a transition in front-office units was noticeable. This process will be accelerated by COVID-19. Staff has shown an enormous flexibility in the wake of the crisis. In a matter of days, the majority of employees was able to work remotely.
We are convinced that clever people management will play a crucial part in emerging stronger from this crisis.
Winning through the crisis requires achievements in key areas early on. Besides liquidity, risk, clients and portfolio and people and organization, keeping an eye on strategy, bank steering and regulatory aspects is equally important.
COVID-19 is truly an enormous challenge for all of us, but at the same time it provides an opportunity to accelerate necessary adjustments in corporate banking, which were already known before the crisis.
There are still many uncertainties the banking sector has to deal with. The development of COVID-19 and the consequences for the economy are still unclear. Senior management, however, has to demonstrate leadership today, work in scenarios to be prepared for tomorrow and be decisive when change provides an opportunity for shaping the future. With this in mind, banks will emerge from the crisis stronger than before.
Felix Becht and Stephan Plietsch have also contributed to this article.